Trade Restrictions and Their Effects
Name ________________ Page ____
When nations specialize and trade, total world output is increased. Companies produce for foreign
markets as well as domestic markets (markets in the home country). Exports are the goods and services sold
in foreign markets. Imports are goods or services bought from foreign producers. In spite of the benefits of
international trade, many nations put limits on trade for various reasons.
1. What is the benefit of specialization and trade?
The main types of trade restrictions are tariffs, quotas, embargoes, licensing requirements, standards,
and subsidies.
A tariff is a tax put on goods imported from abroad. The effect of a tariff is to raise the price of the
imported product. It helps domestic producers of similar products to sell them at higher prices. The money
received from the tariff is collected by the domestic government.
2. A tariff is a _______________ on imported goods. The effect is ____________________. It helps
which two domestic groups? _________________________________ and
______________________________
A quota is a limit on the amount of goods that can be imported. Putting a quota on a good creates a
shortage, which causes the price of the good to rise and allows domestic producers to raise their prices and to
expand their production. A quota on shoes, for example, might limit foreign-made shoes to 10,000,000 pairs
a year. If Americans buy 200,000,000 pairs of shoes each year, this would leave most of the market to
American producers.
3. A quota is a _____________ on the _______ of imported goods. It helps the American companies
because ____________________________________________.
An embargo stops exports or imports of a product or group of products to or from another country.
Sometimes all trade with a country is stopped, usually for political reasons.
4. A embargo is when all __________________ from a country is _____________. This is usually done
for a ______________ reason.
Some countries require import or export licenses. When domestic importers of foreign goods are
required to get licenses, imports can be restricted by not issuing many licenses. Export licenses have been
used to restrict trade with certain countries or to keep domestic prices on agricultural products from rising.
5. _____________ licenses are used to restrict trade with certain _________________ or to keep
American prices from ________________.
Standards are laws or regulations that nations use to restrict imports. Sometimes nations establish
health and safety standards for imported goods that are higher than those for goods produced domestically.
These have become a major form of trade restriction and are used in different amounts by many countries.
6. An example of a standard or regulation might be: ____________________________
Subsidies can be thought of as tariffs in reverse. Instead of taxing the foreign import, the
government gives grants of money to domestic producers to encourage exports. Those who receive such
subsidies can use them to pay production costs and can charge less for their goods than foreign producers. A
tariff is paid for by the buyers of the foreign goods and the buyers of domestic goods who pay higher prices.
But subsidies are paid for by taxpayers who may or maynot use the good.
7. If you were an American company, and the government imposed a subsidiary on your export, would
the government be helping your or hurting you? Defend.
What are the effects of these trade restrictions?
They all limit world trade, which means a reduction in the total number of goods and services
produced. They shift production from more effective exporting producers to less effective domestic
producers. When production is lowered, there are fewer workers earning income. Trade restrictions also raise
prices, which is usually their main purpose.
Trade limits in one country, moreover, usually lead to limits being imposed in other countries. If the United
States places a high tariff on cars made in Japan, for example, Japan may then put tariffs on American goods
sold in Japan.
8. What are two impacts of trade restrictions: ______________________________
9. If the United States placed a tariff on shoes imported from Great Britain, what might Great Britain do
to cotton from the United States that is imported into their country?
_____________________________________________________________________
In spite of these disadvantages, countries are tempted to use trade restrictions to protect their own
industries. Countries that are just getting started use tariffs, quota, and subsidies to protect their industries
until they can compete without government help. The difficulty with this infant industry argument in support
of trade restrictions is that it is not always possible to predict which industries will succeed. Protection
frequently lasts long after the industry has matured.
10. In general, countries use these trade restrictions to do what? __________________
Governments are eager to protect what are called strategic industries. These have included industries,
such as steel, cars, chemicals, and munitions, that are imported during a war. Today, they are more often the
high tech, high wage industries like commercial aircraft production. One way of insuring that they remain
strong is to protect them from foreign competition. Agriculture is another area that many governments try to
protect. Tariffs and subsidies help make sure that domestic farmers can earn enough profits to continue
farming. The decision to use trade restrictions like tariffs is an important one. Tariffs help some domestic
industries, but they mean higher prices for buyers. They help the owners and workers in the protected
industries. They hurt the people who have to pay higher prices for the goods those industries make. Reducing
imports reduces the income of foreigners. They will reduce their foreign purchases, hurting exporting
industries and workers in the nation that put the tariff on the imports.
Without much competition, companies may also use less efficient production methods. This can lead to
poorer quality as well.
11. Do you think tariffs do more good or bad for American countries? Explain.
It is in the best interest of the world economy for each nation to trade freely with all other nations.
However, this practice does not always benefit every nation. For example, exporters who control a large part
of the world's supply of a product can use trade restrictions to change the terms of trade, reducing the amount
of their goods and services they must give up to obtain imports. This was done by the Organizations of
Petroleum Exporting Countries (OPEC) when they restricted their output of oil in the 1970s. By driving up
the price of oil they were able to get more imports for less oil. Most arguments for trade restriction benefit
protected industries and their workers. They also create much greater losses for a nation's economy. In the
long run, a nation must import to export.
12. Why is it in the best interest of the world economy for each nation to trade freely with other nations?
13. Scenario: You are part of the US government in 1828, and you wanted to make some money. You
need to earn some money. You also want to protect the newly developing clothing factories in the
Northern part of the country. You decide to place a tariff on all British cloth coming into the United
States to help your own Northern clothing industry. The good news is that the tariff works – the Northern
factories are doing good business and the US government is making tariff money from Great Britain.
- How might the British government react to this tariff?
- How might the Southern cotton farmers feel about this tariff?